U.S. Auto Industry Decline in 2018: Sales Expected to Drop Due to Fed Rate Hike

U.S. auto industry decline
iStock.com/RainerPlendl

The U.S vehicle industry have observed a decline in sales for the first time since 2009. The expectation of federal rate hikes in 2018 may be contributing toward the decline of U.S auto industry. The Federal Reserve is expected to enact three interest rate hikes this year, which could lead to an auto industry financial crisis.

Not many analysts suggest that auto sales will reach 17 million vehicles in 2018. Analysts anticipate a U.S car sales slump of about 16.7 million in 2018, which would be down from about 17.2 million in 2017.

The Federal Reserve hikes interest rates as a protective measure to control the economy. But, for consumers, these measures make it difficult to buy a new car.

Charlie Chesbrough, a senior economist at Cox Automotive, said that consumers might face slightly higher borrowing costs for things like like credit cards, student loans, mortgages, and car loans. This could cause a drop in car demand, which would directly affect the profits of the carmakers. Cox’s chief economist, Jonathan Smoke, says that higher interest rates have led to a trend toward buying used vehicles instead of new ones.

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Vehicle Sales Declined by 1.8% in 2017 Compared to 2016

For the first time since the last financial crisis, in 2017, U.S. car sales dipped from the prior year. Industry tracker Autodata Solutions, Inc. reported a year-over-year 1.8% decline in U.S. auto industry sales in 2017. In December 2017, vehicle sales declined by 5.2% compared to the same month in 2016. This, however, beat the predictions from Edmunds.com, Inc. (forecasted 5.6% decline) and Kelley Blue Book Co. (forecasted 6.7% decline).

In December 2017, General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), Fiat Chrysler Automobiles NV (NYSE:FCAU), Toyota Motor Corp (ADR) (NYSE:TM), and Hyundai-Kia observed sales declines, compared to the previous year.

However, Nissan Motor Co. Ltd. ADR (NASDAQ:NSANY), Honda Motor Co Ltd (ADR) (NYSE:HMC), Subaru Corporation ADR (NASDAQ:FUJHY), and Volkswagen AG (NASDAQ:VLKAY) posted year-over-year sales increases in December.

Here is the forecasted and performance of the major automakers in December 2017, and for overall 2017:

Fiat Chrysler

  • Edmunds.com forecast for December: -8.2%
  • Kelley Blue Book forecast for December: -11.7%
  • Actual December results: -10.7%
  • 2017 full-year results: -8.2%

Ford

  • Edmunds.com forecast for December: -2%
  • Kelley Blue Book forecast for December: -2.4%
  • Actual December results: 0.9%
  • 2017 full-year results: -1.1%

General Motors

  • Edmunds.com forecast for December: -5.8%
  • Kelley Blue Book forecast for December: -7.9%
  • Actual December results: -3.3%
  • 2017 full-year results: -1.3%

Honda

  • Edmunds.com forecast for December: -5.8%
  • Kelley Blue Book forecast for December: -5.3%
  • Actual December results: -7.0%
  • 2017 full-year results: 0.2%

Hyundai-Kia

  • Edmunds.com forecast for December: -11.3%
  • Kelley Blue Book forecast for December: -9.1%
  • Actual December results: Kia -20.9%
  • 2017 full-year results: Kia -8.9%

Nissan

  • Edmunds.com forecast for December: -5.4%
  • Kelley Blue Book forecast for December: -5.7%
  • Actual December results: -9.5%
  • 2017 full-year results: 1.9%

Toyota

  • Edmunds.com forecast for December: -6.5%
  • Kelley Blue Book forecast for December: -9.6%
  • Actual December results: -8.3%
  • 2017 full-year results: -0.6%

Subaru

  • Edmunds.com forecast for December: (not provided)
  • Kelley Blue Book forecast for December: -6.6%
  • Actual December results: 0.3%
  • 2017 full-year results: 5.3%

Volkswagen AG

  • Edmunds.com forecast for December: -13.2%
  • Kelley Blue Book forecast for December: -10.8%
  • Actual December results: VW brand -18.7%; Audi brand +16.3%
  • 2017 full-year results: VW brand +5.2%; Audi brand +7.8%

According to Edmunds, automakers increased their discounts by only one percent in December 2017, compared to December 2016. The December 2017 discounts averaged $3,459.00 per vehicle. This could indicate that companies are not compromising their profit margin for the sake of market share.

Trend of Auto Industry Layoffs due to Sales Decline to Continue in 2018

Lower demand for cars in 2017 has led to job cuts in the automotive industry, and this trend is expected to continue in 2018. All major U.S automotive companies have been trying to reduce their costs by restructuring their businesses.

A number of auto companies laid off employees last year as cost-cutting measures. General Motors cut more than 3,000 jobs. Ford laid off 1,400 non-factory employees in May 2017, and the company is expected to cut about 10% of  its remaining jobs in the coming years. Tesla Inc (NASDAQ:TSLA) laid off between 400 to 700 employees. Advance Auto Parts, Inc. (NYSE:AAP) laid off 475 employees last summer.

Fiat Chrysler announced that it will be permanently closing a transportation terminal in Toledo, Ohio, which will result in 92 layoffs. Three rounds of job cuts will occur in early 2018: on January 15, February 5, and February 28. Most of the layoffs will be on February 5, when 59 employees will be cut, including 43 interstate drivers and six transportation dispatchers.

Prediction: U.S. Car Sales to Continue Going Down 

Change in consumer demand, combined with the effects of the federal rate hike, will likely be responsible for a U.S. auto industry decline in 2018. The need for passenger cars is decreasing, and the demand for cars offering space, utility, and fuel efficiency is increasing. Proper planning and restructuring measures could help auto companies achieve stable situations though.

 

Sources:

Fed Rate Hikes Expected to Hurt Car Sales in 2018,” Bloomberg, January 2, 2018.

U.S. auto industry’s record sales streak snapped in 2017,” USA Today, January 4, 2018.

Auto sales declined in 2017 for the first time since the financial crisis,” Yahoo! Finance, January , 2018.

Fiat Chrysler plans to lay off 92, close Toledo transportation facility,” The Blade, October 26, 2017.

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